By a vote of 95–2, the Senate on June 22, 2023, approved a resolution of advice and consent to the ratification of a tax treaty between the United States and Chile.Footnote ¹ The treatyFootnote ² had been signed by the two countries in February 2010 and transmitted to the Senate in May 2012, but it had not been considered by the full Senate in the ensuing eleven years, although the Senate Foreign Relations Committee had favorably reported it out four times by near-unanimous votes under both Democratic and Republican leadership.Footnote ³ The delay in scheduling a floor vote had nothing to do with the treaty insofar as it pertained to Chile or taxes. Senator Rand Paul has opposed every tax treaty and protocol since he joined the Senate in 2011 because of privacy concerns with their exchange of information provisions.Footnote ⁴ Deprived by Senator Paul of unanimous consent to proceed to a vote, successive majority leaders were reluctant to move forward on resolutions of advice and consent. Passage of the 2017 Tax Act created an additional hurdle for all pending tax treaties, as they needed to be reconciled with that law's international tax provisions.Footnote ⁵ Overcoming Senator Paul's opposition,Footnote ⁶ the Senate in July 2019 approved four tax treaty protocols that had been on hold for from four to just under nine years.Footnote ⁷ But until its vote on the treaty with Chile in 2023, the Senate had not approved a new bilateral tax agreement since a 2010 agreement with Malta.Footnote ⁸ The treaty with Chile went forward only with the inclusion of two reservations, both designed to reconcile the treaty with the 2017 law.Footnote ⁹ Neither addressed privacy.Footnote ¹⁰ The Senate acted because of the growing strategic importance to the United States of trade with Chile, which has the world's largest reserves of lithium, the mineral critical for the rechargeable batteries that run electric vehicles, smartphones, solar panels, and much else.Footnote ¹¹ Chile's Congress, which ratified the treaty in 2015, will need to re-approve it with the reservations. Once in force, the treaty will be just the second tax treaty with a South American country, following one with Venezuela concluded in 1999.

Bilateral tax treaties generally encourage investment by reducing or eliminating double taxation and creating greater tax certainty. This is accomplished in part through setting reduced tax rates on, or establishing exemptions from, foreign taxation on foreign source income. The bulk of the treaty is composed of such rules, often intricate, setting maximum rates for different types of income that Chile and the United States can impose on each other's residents for the income sourced in their territory, or exempting residents of the other state from taxes on that income. Treaties also facilitate investment through mitigating double taxation by providing that credits shall be allowed by a state for the income taxes paid by its residents to the other state.Footnote ¹² Under these provisions reducing or eliminating taxes imposed by one state on the residents of the other and requiring foreign tax credits, the treaty will reduce or eliminate the Chilean taxes paid by U.S. persons, the U.S. taxes paid by Chileans, and the income double-taxed on both.Footnote ¹³

Because U.S. citizens and residents are subject to U.S. income tax on their worldwide income, the treaty will generally not reduce the total taxes paid by U.S. persons (that is, the amount paid to Chile and the United States combined) below that which is owed under U.S. rates.Footnote ¹⁴ Consequently, the treaty's main benefit to U.S. residents is the reduction in Chilean taxes when Chilean rates are higher than U.S. rates. That is important because it allows U.S. businesses to compete on a level playing field against businesses from third countries that currently pay lower Chilean rates due to the tax treaties their countries have in place with Chile. The set rates also establish certainty—and hence predictability—for U.S. persons regarding Chilean taxes. Additionally, the treaty's double taxation provision will provide clarity to U.S. residents regarding what Chilean taxes are creditable.Footnote ¹⁵

The two reservations to the treaty address changes to the tax code enacted by the 2017 law. The first reservationFootnote ¹⁶ preserves the right of the United States to impose a tax under the law's “Base Erosion and Anti-Abuse Tax” (BEAT) provisions.Footnote ¹⁷ The BEAT rules discourage multinational corporations from making “base erosion payments” from the United States to foreign jurisdictions that would result in their reduced U.S. tax liability. Some analysts have concluded that the BEAT rules are inconsistent with the treaty's articles pertaining to foreign tax credits and nondiscrimination. If that is true, under U.S. law's “latter-in-time” rule, the treaty's provisions would take precedence over BEAT's and thus abrogate BEAT's application in the U.S.-Chile context.Footnote ¹⁸ The first reservation ensures that, even if there is a conflict between the law and the treaty, BEAT will still apply. The reservation's text tracks precisely the language included in the U.S.-Croatia Bilateral Tax Treaty that was signed in December 2022 (and awaiting transmittal to the Senate).Footnote ¹⁹

The second reservation reflects the 2017 law's repeal of Section 902 of the tax code and the adoption in its place of Section 245A. Section 902's “deemed paid credit” allowed a U.S. minimum ten percent shareholder of a foreign corporation from which the shareholder received dividends to take a proportionate foreign tax credit for the foreign corporation's foreign income taxes.Footnote ²⁰ Section 245A instead allows the U.S. ten percent shareholder of a foreign corporation to take a deduction for the foreign source dividends received from the foreign corporation.Footnote ²¹ The reservation deletes the text of Article 23(1) of the treaty requiring the allowance of foreign tax credits, which was drafted in light of Section 902, and replaces it with one based on Section 245A.Footnote ²² This reservation also tracks precisely the language included in the new U.S.-Croatia tax treaty.Footnote ²³

Impetus for the Senate's action after eleven years came from concern that the United States would lose access to Chile's abundant lithium reserves. Chile supplies 40 percent of U.S. lithium imports.Footnote ²⁴ Though the United States has significant lithium reserves itself, it lacks the capacity to produce them, currently operating only one mine. The Biden administration has supported the development of additional production and domestic processing facilities, as have states like California, but the demand for lithium is growing quickly and significantly, outpacing U.S. domestic development.Footnote ²⁵ North Carolina-based Albemarle Corp., the world's third largest lithium producer, is one of only two companies licensed to produce lithium in Chile.Footnote ²⁶ (The other is Sociedad Química y Minera de Chile, which is partially owned by China's Tianqi Lithium Corp.) Albemarle is currently taxed in Chile under a special waiver that gives it the same rate as that which applies to companies from countries with tax treaties with Chile, such as China.Footnote ²⁷ The waiver will expire in 2027, at which point, absent a tax treaty, the rate will increase 9 percent, from 35 percent to 44 percent, making Albemarle less competitive. Senator Chuck Schumer explained that the treaty “expands investment in one of the most mineral-rich regions in the world—critical for making EV batteries and other clean tech. It will ensure that Chinese competitors won't continue to have the edge over U.S. companies in the race for lithium and other minerals when it comes to Chile.”Footnote ²⁸ Senator James Lankford emphasized that “US investors will have stronger access to Chile's deposits of critical minerals like lithium and copper to help reduce our dependence on China and other hostile nations.”Footnote ²⁹

Changing patterns of international trade, investment, and politics promise the negotiation of new tax treaties, the revision of old ones, and the termination or suspension of others. Some new treaties (like that with Croatia) have been finalized and signed but not yet sent to the Senate.Footnote ³⁰ Others (with Norway and Romania) reportedly have been finalized but not signed.Footnote ³¹ Still others (with Israel, Switzerland, and Vietnam) are being renegotiated.Footnote ³² Congress is also considering legislation that would authorize the negotiation of a tax agreement with Taiwan.Footnote ³³ Two previously transmitted tax treaties, with Hungary and Poland, from 2010 and 2014 respectively, remain pending in the Senate.Footnote ³⁴ Both were drafted to replace existing treaties and will need to be updated to take into account the 2017 law.Footnote ³⁵ On July 8, 2022, the United States notified Hungary that it was terminating the 1979 treaty, apparently due to Hungary's opposition to adoption of the EU directive that would implement Pillar Two of the Two-Pillar Solution global tax agreement.Footnote ³⁶ Hungary eventually dropped its opposition, and the directive was agreed to by European Council in December 2022, but the treaty was still terminated.Footnote ³⁷ In August 2023, Russian President Vladimir Putin signed a decree suspending provisions of nearly forty bilateral tax treaties, including one with the United States, due to “the commission of unfriendly actions by a number of foreign states.”Footnote ³⁸